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Ethereum Is Going to Have to Solve Its Fee Problem to Stay Relevant

It is far from a secret. In fact, it’s a well-known, often-discussed issue: Ethereum (CCC:ETH-USD) fees are expensive.

A concept image of mining an Ethereum (ETH) token.
Source: Shutterstock

Those high fees are one of the main reasons Ethereum’s competitors gained so much ground on the second leading crypto in 2021. 

This year doesn’t look to be any different. Fees remain a problem, and users are growing increasingly tired of them.

Network demand plays a factor in determining how much a transaction costs. Thus, one solution is to simply determine when network demand is expected to be lowest, and transact accordingly.

That’s a simple solution, but one that’s ultimately impractical. Nevertheless, let’s consider this chart.

It indicates that the highest times of demand on the Ethereum network occur when people are free and awake. That means around meal times during the week.

So, you can time your transactions around the weekend and late at night in order to obtain lower gas fees. 

Not great, right? If you work, you’ll likely balk at the idea of waking past midnight to get the best fees. If you’re social, you probably don’t want to spend your weekend transacting in Ethereum’s network. In either case, the fees are still notably high. 

This article notes two other alternatives for avoiding high fees: Use Layer 2 protocols or avoid Ethereum entirely. 

More Problems for Ethereum

While these two solutions result in lower ETH gas fees, or none at all, they point to a larger issue. Until Ethereum finds a way to reduce gas fees while keeping users entirely on its network, it will continue to suffer. 

One of the current options is to utilize a layer-2 solution. Layer-2 protocols are what are referred to as scaling solutions. In other words, we grew too big, too fast and now we can’t accommodate you efficiently.

A bunch of layer-2 solutions have been launched to take some of the pressure off of Ethereum’s network in the past few years. 

According to that article linked above, Polygon (CCC:MATIC-USD) is among the most popular layer-2 solutions. These offload the transactional throughput onto a separate network which is then finalized on Ethereum’s network. 

The result is lower fees, but the user maintains the underlying usage of Ethereum’s blockchain and its inherent security. But that seems unnecessarily complex. 

Real Solution?

In my mind, that’s hardly a viable solution. It’s clearly complex and the simple truth is that the more complexity there is in transacting on Ethereum, the less likely people are to use it. It plainly isn’t a point of attraction. 

Ethereum is asking users to begin on its network, switch to another, then come back in order to transact ETH. It isn’t a long-term solution. And that has swung the doors of opportunity wide open for competitors. 

Last year saw Ethereum’s competitors gain a lot of ground. They include names like Avalanche (CCC:AVAX-USD) and Solana (CCC:SOL-USD). 

Avalanche grew from $3.50 to $114 throughout 2021. Solana, from $1.80 to $178 in the same period. Ethereum also grew tremendously, going from $975 to $3,700. But the trend was clear. 

And you have to attribute a good portion of that to high ETH gas fees. 

What to Do

Ethereum still holds a dominant position in the cryptocurrency market. It is likely to continue to appreciate for that reason. Investors shouldn’t ignore the seriousness of the gas fee issue. It makes Ethereum much less approachable than it otherwise should be.

The solutions, including layer-2 protocols, aren’t solutions at all. They simply make other competitors more attractive.

I can’t say ETH is going down, but I can say that its competitors continue to look more attractive. 

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.

Article printed from InvestorPlace Media, https://investorplace.com/2022/01/ethereum-is-going-to-have-to-solve-its-fee-problem-to-stay-relevant/.

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